Economics of Trade Wars Tariffs Retaliation and Who Really Pays.
Economics of Trade Wars Tariffs, Retaliation and Who Really Pays.
To discern the contemporary global economy, it is necessary to understand the actual parties that will be paying in a trade war.
How Tariffs Work: The Basics
A tariff refers to a duty on imported products. The government charges a fee when a foreign product enters a country and it is usually a percentage of the value of the item or a given amount per unit that is paid by the importer to the state.
That being the case with the simplicity. The cost is not simply passed on to the importer, who is typically a local company. It passes the burden along. To the consumers, sometimes raising the prices, to foreign suppliers, sometimes reducing the orders; to local workers, sometimes cutting the hours or laying them off. It is market forces which dictate who bears the tariff.
The first casualty Domestic Consumers and Business.
The direct and immediate expenditure of tariffs is on domestic consumers and the business people that rely on imported inputs.
American companies that imported Chinese products paid the tariffs that were imposed by the United States. Megabox stores like Walmart and Home Depot and an uncountable number of small stores incurred an increased cost on products like electronics and furniture to machinery. They were faced with three alternatives, to shoulder the burden and profit margins would be reduced, to increase prices and risk losing a client or to seek alternative suppliers, usually at a higher rate.
Most chose a mix of all three. Prices rose. Profit margins narrowed. And in the end the American consumers were forced to pay more on the same products.
In a research carried out by Federal Reserve, Columbia University and Princeton economists, it was revealed that the entire cost of US tariffs on Chinese products fell on American consumers and importers. Chinese exporters refused to reduce their prices, and thus, the US importers paid the entire tax and transferred it to the consumers, increasing the consumer prices. The research had approximated an extra cost of an estimated 419 dollars per annum per household in the USA increased prices.
The Myth of Foreigners Paying.
The rhetoric of trade-war can often argue that foreigners have to pay the tariffs- i.e. imply that China writes a cheque to the US Treasury each time a container is shipped. This is simply false.
When the export value of their goods in foreign markets is reduced due to tariffs increasing the prices of their products, foreign exporters do not contribute to the US treasury. The American firms pay the money, which consequently affects the way they conduct their business, affecting US workers and consumers.
In cases where the EU imposes tariffs on the motorcycles in US, European importers pay the tax. The Canadian importers suffer when Canada responds by imposing tariffs on US dairy. The government that gathers the tariff is the beneficiary although it is paid not by foreign but by local organizations.
Revenge: The Escalation Spiral.
The trade wars are hardly one sided. Nearly every country receiving a tariff responds, and attacks the most sensitive sectors of the imposing nation.
When US put tariffs on both allies and enemies on steel and aluminum, the EU retaliated by imposing tariffs on American motorcycles, bourbon, jeans and farm goods. Canada was a target of US dairy and wine. Mexico targeted pork and steel.
The logic is political. The retaliation is crafted to cause suffering to the export-oriented communities, and this is where the domestic pressure is stirred against the conflict of trade war. Harley-Davidson, which had to pay tariffs in the EU, had to transfer part of its production to abroad. The exports of bourbon distillers in Kentucky declined. Markets that were important to farmers were lost.
These retaliatory tariffs are paid by local consumers in the retaliating nations-Europeans paying higher prices on American jeans, Canadians paying higher prices on US wine but they are also detrimental to the workers and businesses in the embarking nation. The pain is bilateral and diffuse.
The Supply Chain Disruption
In addition to producing direct impacts on prices, tariffs also upset the complex supply chains modern manufacturing is based on. A product made in Mexico can have an element of the US, China and Europe. The existence of tariffs in any border increases the cost of all parties in the chain.
Take the case of the automobile industry. The car manufactured in the US may be powered by a Mexican engine, Chinese electronics and Canadian steel. Any of these inputs attract tariffs that increase the cost of production by the American automakers and hence, their vehicles become less competitive in the local and international markets.
These shocks have an impact on the economy. Suppliers lose orders. Workers face layoffs. New Capacity is slowed down. The latter happens to be quite more substantial than the direct tariff costs.
According to a study by the Federal Reserve Bank of New York, the US manufacturing employment and investment decreased by an average of 0.7 and 1.9 percent respectively, due to the US-China trade war. These are not just abstract statistics, they are lost jobs, factories that were not constructed, opportunities that were not realized.
The Concentrated Minorities: The Winners.
Trade wars are not without winners but they are not more than a few and focused. The domestic industries competing with imports may have less foreign competition.
A US steel mill with less Chinese steel competition will be selling more and employing more. A soybean farmer who is shielded against the European rivals might benefit. Yet these profits are at the cost of other people. All the manufacturers that work with steel, including appliance manufacturers, building companies, automakers, and their customers all pay the profits of the steel mill. The protection of soybean farmers would increase food expenses to all.
Further, safeguarded industries are hardly competitive in the absence of continued protection. They are insulated against international competition and they lack the motivation to innovate, raise quality and manage costs. They gradually become even more disadvantaged in comparison with the rest of the world, which makes the eventual rectification more agonizing.
The Geopolitical Cost
Trade wars have other political effects other than economic. Enemies that have been pushed away by tariffs might find an affinity with their competitors. Rerouted supply chains due to tariffs could be forever changed causing less influence to the country of initiation.
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